THE concern in the market over Jain Irrigation’s plan to foray into “unrelated” business and dilute equity appears farfetched. A dedicated non-banking financing company (NBFC), which Jain Irrigation plans to set up, can offset problems due to rising receivables. An equity dilution will bring down debt and save interest cost, which may be earnings accretive.
Huge working capital and rising debt have long been key concerns for the company. The proposed change in the objects clause to include ‘power generation’ concerns its existing windmills and there are no further investments planned in this area.
The scrip has recovered nearly 12.5% in two trading sessions after losing over 30% in three days in response to the company’s announcements of its plans. A weak financial performance during the December quarter also dragged the stock down. The 25% profit growth was mainly due to a one-time receipt of . 39.8 crore as VAT refunds for five quarters. The refunds were under Maharashtra’s incentive scheme for investments and employment generation, and the company is likely to benefit from this scheme in the coming quarters as well.
The company’s micro-irrigation systems business earns half of its revenues from the government in the form of capital subsidy to farmers. Delays in government’s payments have increased the receivables for the company, which stood at over . 1,000 crore at the end of March 2010 and is likely to go up to . 1,300 crore by the end of March 2011. As the company expects a 30%-plus growth from this business in the coming years, the bulging working capital problem needed a solution. The proposed NBFC will address this issue.
The . 700 crore the company plans to raise by issuing shares to qualified institutional investors will help it bring down debt from the current . 2,100 crore to around . 1,500 crore. In a rising interest rate scenario, when the company is paying interest at around 12% on an incremental loans, this could save the company . 60-70 crore in interest cost annually. This will result in the growth of the company’s earnings per share (EPS).
The promoters plan to subscribe to 62 lakh warrants, to ensure their stake in the company doesn’t fall too much.
Jain Irrigation’s business is workingcapital intensive, as is evident from the fact that its investment in working capital at over . 1,700 crore was 23% higher than in fixed assets as on September 30, 2010. All this working capital needs financing, which has increased the debt burden and interest costs, which eat into at least one-third of its gross profit. At a when interest rates are rising, its plans for equity dilution and setting up an NBFC should be seen as attempts to mend its house in time and achieve its aim of aggressive growth. Investors should be worried if these steps get delayed.
Huge working capital and rising debt have long been key concerns for the company. The proposed change in the objects clause to include ‘power generation’ concerns its existing windmills and there are no further investments planned in this area.
The scrip has recovered nearly 12.5% in two trading sessions after losing over 30% in three days in response to the company’s announcements of its plans. A weak financial performance during the December quarter also dragged the stock down. The 25% profit growth was mainly due to a one-time receipt of . 39.8 crore as VAT refunds for five quarters. The refunds were under Maharashtra’s incentive scheme for investments and employment generation, and the company is likely to benefit from this scheme in the coming quarters as well.
The company’s micro-irrigation systems business earns half of its revenues from the government in the form of capital subsidy to farmers. Delays in government’s payments have increased the receivables for the company, which stood at over . 1,000 crore at the end of March 2010 and is likely to go up to . 1,300 crore by the end of March 2011. As the company expects a 30%-plus growth from this business in the coming years, the bulging working capital problem needed a solution. The proposed NBFC will address this issue.
The . 700 crore the company plans to raise by issuing shares to qualified institutional investors will help it bring down debt from the current . 2,100 crore to around . 1,500 crore. In a rising interest rate scenario, when the company is paying interest at around 12% on an incremental loans, this could save the company . 60-70 crore in interest cost annually. This will result in the growth of the company’s earnings per share (EPS).
The promoters plan to subscribe to 62 lakh warrants, to ensure their stake in the company doesn’t fall too much.
Jain Irrigation’s business is workingcapital intensive, as is evident from the fact that its investment in working capital at over . 1,700 crore was 23% higher than in fixed assets as on September 30, 2010. All this working capital needs financing, which has increased the debt burden and interest costs, which eat into at least one-third of its gross profit. At a when interest rates are rising, its plans for equity dilution and setting up an NBFC should be seen as attempts to mend its house in time and achieve its aim of aggressive growth. Investors should be worried if these steps get delayed.
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